RBI status quo on key rates

Says uncertain monsoon may further aggravate inflation in food products

 Accordingly, RBI has maintained status quo on the Cash Reserve Ratio (at 5 per cent), repo (4.75 per cent) and reverse repo (3.25 per cent) rates.  However, RBI in its first quarter review of monetary policy for 2009-10 unveiled here has increased its growth projections for GDP in the current fiscal to be maintained at 6 per cent with an upward bias. Inflation continues to be RBI’s one its prime concerns, which is now projected at 5 per cent from the earlier 4 per cent and at the same time, it warned that an uncertain monsoon could further accentuate inflation in food items.
 
Spur investment

Though perception gains currency that with no change in the policy rates to dissipate any hope of further rate cut in home, auto and consumer loans for now, but RBI Governor Dr Subbarao believes ‘there is scope for banks to lower lending rates further.’  Addressing the press conference after unveiling the first quarter review of the RBI credit policy here, Subbarao said “Bankers felt that the status quo on policy rates would anchor interest rate expectations that could spur investment and they expect credit demand to pick up in the second half of the year.”

At the same time, he continued, bankers were concerned over declining in the share of current and savings (CASA) deposits which could impact their net interest margins (NIMs).  Banks were of the view that non-performing assets (NPAs) are expected to increase, especially in the unsecured segment, although they will remain manageable, said he.

He hoped the government’s monetary, fiscal steps would boost domestic demand. “The domestic, external financing environment has improved since the second half of fiscal year 2009. The business outlook has turned positive. RBI will continue to keep its eye on credit growth in the system.” Subbarao said he saw visible signs of economic recovery.

However, there are certain risk factors in the economy, especially in the farm sector, given the uncertainty over the monsoon, he said while expressing concern that performance of farm sector could have a spill over effect on the industrial sector as well.

Immediate challenges

Listing out the immediate challenges facing the economy, Subbarao said the first was to manage the balance between short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressure on the way forward by maintaining the accommodative monetary stance till demand conditions improve and credit flow takes hold.   The second to manage government’s large borrowing programme without crowding out present or potential private credit demand and the third is to maintain policy rates and liquidity conditions conducive for spurring private investment demand, while the fourth and last challenge is to restore fiscal consolidation process by laying down roadmap. 

Asked to elaborate, he said: “At this point of time, the roadmap is not the realm of public disclosure and when it is due, we will divulge it.”

In the credit policy report, he said the overall macro scenario was is uncertain. “Export demand remains weak. The services sector is sluggish on lagged impact of weak industry growth.” Subbarao hoped the government’s monetary, fiscal steps would boost domestic demand. “The domestic, external financing environment has improved since second half of fiscal year 2009. The business outlook has turned positive. RBI will continue to keep its eye on credit growth in the system.”

On monetary policy stance, RBI Governor reiterated that the apex bank will be accommodative but this stance.  In the sense, RBI will reverse the expansionary measures to anchor inflation expectations.

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